Ratings Assigned To Cash Flow CLO Transaction Avoca CLO XVIII

Stocks and Financial Services Press Releases Thursday May 24, 2018 17:41
LONDON--24 May--S&P Global Ratings

LONDON (S&P Global Ratings) May 24, 2018--S&P Global Ratings today assigned its credit ratings to Avoca CLO XVIII DAC's class A, B-1, B-2, C, D, E, and F notes. At closing, Avoca also issued unrated subordinated notes (see list below).

Avoca XVIII is a European cash flow collateralized loan obligation (CLO), securitizing a portfolio of primarily senior secured leveraged loans and bonds. KKR Credit Advisors (Ireland) is the transaction manager.

The ratings assigned to the notes reflect our assessment of:
  • The diversified collateral pool, which consists primarily of broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality and portfolio profile tests.
  • The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization.
  • The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading.
  • The transaction's legal structure, which is bankruptcy remote.

Under the transaction documents, the rated notes pay quarterly interest unless there is a frequency switch event. Following this, the notes permanently switch to semiannual payment. The portfolio's reinvestment period ends approximately four years after closing.

Our ratings reflect our assessment of the collateral portfolio's credit quality, which has a weighted-average 'B' rating. We consider that the portfolio on the effective date will be well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow collateralized debt obligations (see "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Aug. 8, 2016).

In our cash flow analysis, we used the EUR400 million target par amount, the covenanted weighted-average spread (3.40%), the reference weighted-average coupon (4.50%), and the target minimum weighted-average recovery rate at the 'AAA' rating level as indicated by the collateral manager. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category.

The Bank of New York Mellon, London Branch is the bank account provider and custodian. The bank's downgrade remedies are in line with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013).

Under our structured finance ratings above the sovereign criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned rating levels (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016).

The issuer is in line with our bankruptcy remoteness criteria (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).
Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our ratings are commensurate with the available credit enhancement for each class of notes.

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